Wall Street leads to the Great Wall

Commentary: Will U.S. banks or brokers be able to compete overseas?

NEW YORK (MarketWatch) -- China is the future of Wall Street. But Wall Street may not be in China's future.

Despite the Asian giant's phenomenal expansion and the plentiful opportunities that growth provides the U.S. financial services industry, Wall Street appears to be ill-prepared to capture the business bubbling up from the country and its neighbors.

The U.S. banks and brokerages that traditionally dominated capital markets overseas are on the sidelines, dealing with the fallout from the credit crisis. They include some of the biggest names on the bailout shame list including Citigroup Inc. , Bank of America Corp. and American International Group Inc.

Before the credit picture turned in the fall of 2007, those companies and others were among the biggest suppliers to the nascent Chinese economy. U.S. firms were among the leaders in partnering with Chinese banks and brokerages to sell U.S. know-how. China was slowly relaxing its rigid barriers to foreign finance.

On the eve of the U.S. crisis, Bank of America held a 16% stake in China Construction Bank, Citigroup was among the biggest foreign banks in China, owning a 20% stake in Guangdong Development Bank, and one of AIG's fastest growing subsidiaries was Hong Kong-based American International Assurance Co.

Had the financial crisis not forced the U.S. financial system into retreat, those banks would have been first in line to finance and advise the flurry of dealmaking happening in the Far East.

China's rapid growth

And what a flurry it's been. In lieu of a Western success story, China has filled the vacuum. Its gross domestic product is growing at an annual 8% rate as GDP in the United States is shrinking at a 1% annual rate. But it's not just about the economy. China's markets led the global selloff on Monday. See full story.

Asia, led by China, is closing the gap in mergers and acquisitions this year. More than 1,300 deals valued at a combined $62 billion have been announced in Asia this quarter, compared with about 1,100 deals valued at $48.3 billion announced in the Americas, according to Dealogic.

Chinese acquirers including China National Offshore Oil Corp. and Yanzhou Coal Mining Co. are gobbling up assets around the world. M&A volume year-to-date is down 47% in the Americas and 40% in Europe, but off just 12% in Asia compared with the same period last year, Dealogic says.

Through July 17, Asian countries excluding Japan were on pace to raise more sovereign debt than they have in four years. China accounted for nearly 40% of the $15.2 billion raised in the region, Dealogic says.

But it's lending that tells the real story. China loaned $852 billion globally through the first five months of the year. China's lending volume was so robust that in July, regulators issued new lending guideline out of fear "this record-breaking surge in lending may have created systemic risks to China's banking system," said Karen Tang, a legal adviser to financial institutions in the region.

Yankees gone home

The lending boom suggests China seems to have found its own financial footing, and a wave of new partnerships with mostly European banks is filling in the rest. In January, Deutsche Bank AG announced a joint venture with Shanxi Securities Co. UBS AG lost $18 billion last year but pledged in April to expand its offerings in China. The bank has a joint venture with the State Development Investment Corp.

More than a third of UBS AG and Deutsche Bank's equity underwriting revenue came from Asia in the first half of the year, and among Western banks only UBS ranks among the top 10 underwriters of Chinese stock offerings this year through Monday.

Foreign rivals are filling the void left by the Americans. B. of A. sold a third of its China Construction Bank stake to raise cash earlier this year. Citigroup is under pressure to sell its 20% stake in Guangdong Development and AIG announced it will sell American International through a public stock offering earlier next year.

That's too bad, because the forecast for economic growth in the U.S. and European markets is less-than sunny. In many ways, the deck was stacked for U.S. brokers and banks. China was primed to be the biggest consumer of sophisticated finance. Financial expertise had been our best export.

Now, it's all gone the way of little red books -- a novelty, not required reading.